RBI opens gates for more overseas investments

The Dollar Business Bureau

 The Reserve Bank of India has further opened the gates for more overseas investments into India through a series of steps. These steps have been detailed in its circular no.6 dated 20 October, 2016. This comes in the wake of possible outflows of FCNR-B deposit maturities of $26 billion.  

The notification issued yesterday directs in its points the following changes:

1. In all sectors where there is a limit/cap on foreign investment, such limit/cap shall be reckoned in a composite manner. In other words, “sectoral cap”, i.e., the maximum amount which can be invested by foreign investors in an entity will include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedules 1, 2, 2(A), 3, 6, 8, 9 and 10 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000. Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs) having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment under such composite limit/cap. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment under the composite limit/cap. 

2. Total foreign investment” in an Indian company will be the sum total of direct and indirect foreign investments. 

3. Portfolio investment up to aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is lower, will not be subject to either Government approval or compliance with the sectoral conditions, as the case may be, provided such investment does not result in change in ownership leading to control of Indian entities. 

4. A company shall be considered as owned by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens. A Limited Liability Partnership (LLP) will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share. 

5. Foreign investment in LLP is permitted under the automatic route if the LLP is engaged in sector where 100% FDI is allowed and there are no attendant FDI-linked performance conditionalities to the sector.

The bank has allowed 100% FI through the automatic route to regulated financial services companies other than banks or insurance companies and has simplified rules for easier entry of venture capital funds in start-up ventures in the country. The bank has also eased the external commercial borrowing regulations. 

To boost inflows further, the central bank has allowed FI’s upto 100% under the automatic investment route in other financial services, especially in those activities which are regulated by any financial sector such as RBI, SEBI and IRDA. Continuing in the same vein, the Central Bank  specifies that financial services that are not regulated or partly regulated or instances where there is less clarity regarding regulatory oversight, upto 100% FI will still be allowed under the government approval route.  

FI’s by way of swapping of shares has been permitted provided the resident company in which the investment is made has a Merchant Banker registered  with the SEBI or an appropriate regulatory authority outside India in the host country. The same has been detailed in the circular under the mentioned points: 

1. Foreign investment by way of swap of shares has been permitted provided the resident company in which the investment is made is engaged in an automatic route sector subject to the condition that irrespective of the amount, valuation of the shares involved in the swap arrangement will have to be made by a Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
2. In terms of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016 notified vide Notification No. FEMA 361/2016-RB dated February 15, 2016, a Non-resident Indian (NRI) has been permitted to purchase or sell shares, convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, on repatriation basis (under Schedule 3 to FEMA 20) and non-repatriation basis (under schedule 4 to FEMA 20). Investment by an NRI, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by NRI, on non-repatriation basis under Schedule 4 of notification will be deemed to be domestic investment at par with the investment made by residents.